Sun’s Share Price Bears Watching in Oracle-EC Showdown

The SEC and others should keep a close watch on Sun Microsystems’ share price, and any big trades that influence it, in the weeks ahead.

As Oracle’s $7.4-billion bid for Sun is delayed by an extended regulatory review by the European Commission (EC), the risk is great of somebody benefiting financially from improper access to inside information.

Oracle wants to go through with its purchase of Sun, but it wants to acquire the whole company, including MySQL. Oracle CEO Larry Ellison has stated explicitly that he wants to own MySQL and has no wish to spin it off.

Conversely, European regulators have competitive concerns about Oracle’s ownership of MySQL. The regulators aren’t concerned so much with MySQL’s open-source integrity as they are with the fact that Oracle, IBM, and Microsoft control approximately 85 precent of the worldwide database market.

MySQL competes against Microsoft’s SQL Server in many developing markets where Oracle’s relatively high-priced database products aren’t major players. Oracle sees those developing markets as critical to future growth. With MySQL in hand, Oracle could gain market share in developing markets while hurting Microsoft. For Ellison, who always likes to win but enjoys it more when he’s beating an archenemy, there isn’t a better scenario.

But the EC might look askance at Oracle taking MySQL off the board. Again, the objections from the EC relate to competitive matters, not to issues of open-source integrity. Oracle has said it would keep MySQL alive, that it would continue developing and supporting it, and those assurances haven’t been good enough for the European regulators. That’s because the issue is market dominance, and Oracle doesn’t become any less dominant as the owner of MySQL. To the contrary, one could argue that it will become stronger, particularly in markets where it currently has a modest profile.

The two sides are digging in and compromise will prove difficult. As long as Oracle insists on ownership of MySQL, the EC is likely to deny the Sun acquisition. Somebody will have to blink or it could end in tears, with Oracle walking away from the table, Sun slipping further into the swamp of despond, and perhaps the whole cycle to start again with IBM reasserting a modified version of its previous Sun bid.

Now I’ll circle back to my original point. Given that the two sides are intractably opposed to one another, what happens if somebody gains early knowledge of how the EC will rule in its review? Similarly, what happens if somebody knows what Oracle’s braintrust is thinking and how it will respond to an ultimatum from the bureaucrats in Brussels?

Sun’s shares are trading at a 16-percent discount to Oracle’s $9.50-per-share takeover offer. That tells us doubts are growing about whether the transaction will go through. What we don’t know is whether that movement is driven by “smart money” or by conjecture based on regulatory enigmas, deductive reasoning, and speculation.

The situation bears watching. It isn’t as if insider trading hasn’t been known to occur in these circumstances.

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Cisco’s Brinkmanship with Tandberg Shareholders

Cisco Systems seems to be indulging in some brinkmanship in its showdown with dissident Tandberg shareholders obstructing the networking giant’s acquisition of the Norway-based videoconferencing-systems vendor.

A Reuters report, quoting a “source familiar with the matter,” indicates that Cisco is reviewing its options in relation to the Tandberg transaction. Those options include withdrawing or raising its $3-billion bid.

Hamlet was set in Denmark, not Norway, but that historical footnote won’t prevent Cisco from doing some procrastination of its own. According to the Reuters source — who likely is from within the Cisco camp — Cisco probably will not decide whether it wishes to buy or not to buy before the tender offer for Tandberg’s shares expires on November 9.

Investors holding approximately 24 percent of Tandberg’s shares rejected the Cisco offer, even though Tandberg’s board of directors recommended that shareholders approve the deal. To consummate the transaction, Cisco must gain the acceptance of shareholders possessing 90 percent of Tandberg’s stock.

Cisco actually has multiple options. Rather than increasing the value of the offer or withdrawing it altogether, Cisco could extend the original offer. Given that no white-knight buyer has appeared on the horizon, as I mentioned previously, Tandberg’s recalcitrant shareholders must consider their next move carefully.

For its part, Cisco is saying that it has made a fair offer. It has made noises about rescinding the takeover bid, but the Reuters source indicated that Cisco “is far from deciding that it will withdraw its bid, although it is being strongly considered by top executives.”

Said one of the restive Tandberg shareholders:

“It would seem odd to me that (Cisco) would walk away for a few hundred million dollars … I think for 170 NOK they will probably get it through.”

Maybe that’s all Cisco needed to hear.

Cisco clearly wants to fill out its top-heavy telepresence offerings with Tandberg’s broader, market-leading videoconferencing product portfolio. In theory, CIsco could spurn Tandberg and consider Polycom as an alternative, but the fit would not be as good, with Cisco having to pick up audioconferencing products it probably wouldn’t value.

Cisco probably isn’t elated about having to deal with a Tandberg shareholder uprising. That said, it will not behave irrationally.

If it makes a sweetened bid, Cisco will make sure it’s a modest one. If that Tandberg shareholder’s sentiments are representative of 14 percent of holdout shares, then Cisco would have to boost its offer by a little more than $300 million to close the deal.

Cisco will make the Tandberg rebels sweat — it doesn’t want to go through this sort of ordeal every time it attempts to buy a company — but the deal will get done.

McAfee and Symantec Contend for Market Share and Stock-Market Favor

Two major security-software vendors released their latest quarterly results this week. It’s instructive to look at how the markets reacted to those results and to look ahead and see what we can discern about each company’s prospects moving forward.

Symantec, which had been struggling in prior quarters, surpassed the expectations of market watchers in its second quarter, which ended October 2. Excluding certain costs, profit was 36 cents a share; analysts had predicted 33 cents on average, according to a Bloomberg survey. Including revenue from acquired companies, sales were $1.48 billion, exceeding the average estimate of $1.43 billion, but down three percent from the same quarter a year ago.

Symantec saw six-percent growth in its sales of security software to consumers. Sales in the storage and server-management segment fell nine percent, while security and compliance sales slid three percent. Symantec, which had previously experienced sales-execution problems in enterprise-security markets, seems to be rectifying that problem, with several high-value deals coming to fruition in vertical markets such as financial services, the federal government, and telecommunications.

Geographically, Symantec saw growth in China specifically and Asia more generally, and it saw a semblance of stability beginning to return to its business in North America.

Extending a previous practice, Symantec will buy back up to $1 billion in shares through public and private transactions. Symantec still has about $57 million remaining under its current share-repurchase plan. The company has bought back over $1.9 billion in shares since the last plan was approved in June 2007.

Share-buyback programs usually enhance the value of remaining shares, but they also have the effect of making it easier for executives to reach performance-based benchmarks because the earnings-per-share value increases as the number of shares in circulations decreases.

The overall theme of Symantec’s results was stabilization, and the market was appreciative. Symantec shares went up after the results were announced.

If Symantec benefited from the market’s low expectations, McAfee was undermined by the market’s relatively high expectations.

You wouldn’t know it from most of the business-press headlines regarding McAfee’s results, but the company actually did well in its fiscal third quarter.

McAfee reported sales of $485.3 million, up 18 percent from $409.7 million in the same period last year, just below the $486.6 million that Wall Street had predicted. Meanwhile, the company reported profit, excluding items, of 62 cents per share for the third quarter, above the average forecast of 60 cents, according to Thomson Reuters I/B/E/S.

The company is seeing slower growth on sales of anti-malware products to consumers. Up eight percent to $177 million in the quarter, consumer sales grew at their slowest rate since 2007. On the other hand, corporate sales grew 25 percent to $308 million, even though McAfee CEO Dave DeWalt said enterprise sales were affected by reduced sales of PC-based anti-malware software to companies that have fewer employees than they had previously. With fewer employees, companies have less need for PCs and PC software, including security products.

DeWalt made an interesting point about software sales to consumers. He noted that accounting rules require McAfee to book revenue from each consumer sale over 36 months. As such, he said, revenue reported in any one quarter is “a backward looking indicator.”As for what transpired specifically in the third quarter, DeWalt said consumer bookings grew 12.5 percent.

Looking ahead, McAfee foresees fourth-quarter profit, excluding items, of 61 to 65 cents per share on revenue of $505 million to $525 million. Analysts expect McAfee to earn 63 cents per share on revenue of $507 million.

McAfee fell just short of expectations on the revenue side, and it was punished accordingly by analysts and investors alike. Conversely, Symantec wasn’t a train wreck, as some analysts had anticipated, so it was rewarded for taking steps toward stability.

Although some of the business press focused on Symantec’s pickup in consumer business, the real battle between it and McAfee will occur in enterprise accounts, from SMBs all the way up to the largest corporations. Even though investors like the margins associated with anti-malware sold to consumers, that market is intensely competitive, even more so now Microsoft finally has a free consumer offering, Microsoft Security Essentials (MSE), that is good enough to cut into the for-pay sales of Symantec, McAfee, Trend, and others.

Neither Symantec nor McAfee will admit that Microsoft is a threat on the consumer front, but, behind the scenes, they must be concerned about market erosion.

Symantec is making considerable effort to rectify the problems it had in its SMB channel. It also won some big enterprise deals. Increasingly, what it does in enterprise markets will be critical to its long-term prosperity. Although evidence suggests McAfee is gaining ground on Symantec in business markets, “big yellow” is getting back to basics and will make its smaller rival earn any further advances.

It won’t be easy for either vendor. Even as they’re getting pinched competitively in the consumer space, Symantec and McAfee confront constrained corporate budgets.

According to Bloomberg, Goldman Sachs Group reported this month that enterprise global spending on security programs next year will grow about 5 percent, compared with an 8 percent increase for all enterprise software.

Embattled Alcatel-Lucent Hopes to be Ready for Rising Tide

When Ben Verwaayen took over as CEO of Alcatel-Lucent, he inherited a listing ship full of mismatched baggage and angry recriminations from his French and American senior officers, who formed the company and gave it its ungainly name in a disastrous merger of two equally beleaguered telecommunications-equipment vendors.

Nobody would mistake Alcatel-Lucent for the Love Boat. To this day, the word “troubled” often serves as a preceding adjective in describing the company.

To his credit, Verwaayen not only has, in his words, “played with the cards he was given,” but he’s been determined to look forward rather than backward, not seeking to condemn or to defend the corporate marriage of convenience and desperation that took two embattled, large companies and turned them into an incontinent, self-harming colossus.

Running Alcatel-Lucent is a dirty job, and, for now, Verwaayen has to do it. As he’s said previously, his goal is to get the company’s house in order, to avoid M&A hijinks, and to turn Alcatel-Lucent into a “normal company.”

In releasing its third-quarter results today, Alcatel-Lucent disclosed that it continues to cut costs, continues to inch toward improved operating margins, but that it also continues to struggle to generate top-line growth.

Losses reached €182 million ($269 million) in the third quarter. That was more than the €40 million it lost a year earlier and worse than analysts had forecast. Revenue fell 9.3 percent in the third quarter to €3.7 billion, also below market expectations.

In its legacy fixed-line telecommunications business and in its wireless-equipment group, Alcatel-Lucent is suffering from torpid market conditions and intensifying competition. The latter is particularly true in the higher-growth wireless side of the house, where Alcatel-Lucent faces its usual adversaries — Ericsson and Nokia Siemens Networks — as well as hard-charging Chinese players Huawei and ZTE.

The Chinese players are on the rise, with the European aristocracy back on its heels, looking for areas — such as Ericsson’s emphasis on services — where they can hold a long-term edge over the lower prices and improving quality of the Chinese vendors’ equipment.

Markets, and the buyers within them, are a problem for Alcatel-Lucent, too. Europe, traditionally its strongest market, remains in the dumps. Credit is brutally tight for operators in Eastern Europe and most of the developing world beyond China and India, making it tough for Alcatel-Lucent to identify and benefit from growth markets. In the US, where the company derives about a third of its business, it is competitive but doesn’t expect a major upturn until 2011.

It’s a tough world for Alcatel-Lucent, and its been that way for a while. The company hasn’t earned a quarterly net profit since 2006.

As for the remainder of this fiscal year, Verwaayen remains hopeful that the company can break even for the 12-month period. To reach the break-even point at adjusted operating level, according to the Financial TImes, the company will need to record operating profits of about €360m in the fourth quarter.

Given that a growth surge isn’t anticipated, Verwaayen and his executive team will have to fiercely slash costs to reach their year-end objective. The company reiterated its expectation that the market for telecommunications equipment will decline between eight to 12 percent on the year, and it doesn’t sound particularly sanguine about an immediate sales spike. Meanwhile, Alcatel-Lucent is about 80 percent through a cost-cutting regimen that targeted a €750-million reduction in annual expenditures. (Non-core asset sales also might occur soon.)

Verwaayen and his team don’t see a bonanza in 2010. Instead, they see growth of approximately five percent, not in the high single digits. They have more hope for 2011, and some of that hope — at least for network upgrades and a better overall economic climate globally — seems justified. Then again, even if the market rebounds by then, will Alcatel-Lucent be best positioned to benefit disproportionately or even commensurately with the rising tide?

It’s a question one needs to consider. Huawei and ZTE will only get stronger, and Ericsson isn’t going away. There are big questions surrounding Nokia Siemens Networks, not least of which is the parent companies’ desire to persist in the joint venture. Then again, it’s difficult to know now whether the restructuring or sale of that company ultimately will help or hurt Alcatel-Lucent.

The rising tide might be coming, but it remains to be seen whether Alcatel-Lucent will be sufficiently seaworthy to prosper from the next leg of the market’s journey.